12 Dec 2019 18:00 IST

It never pays to be penny wise and pound foolish

Tempted by the short-term gains from a certain course of action, leaders often pay a big price later

The airline sector in India is facing some headwinds. The outlier airline that had seemed unaffected so far, no matter what the crisis, is also in trouble. IndiGo is facing boardroom tussles and spats that have resulted in several of its aircraft being grounded. There was an interesting analysis on this.

Apparently, to save fuel, IndiGo had instructed its pilots to use maximum thrust just after take-off — this does save fuel, as the aircraft reaches cruising altitude faster, but can put more pressure on the engines and may have contributed to the 13 incidents of engine issues that IndiGo suffered this year. GoAir, the other airline in India that also uses Pratt & Whitney engines on its A320neo aircraft, has not had any incidents of engine trouble, as its pilots use the more gentle alt-climb approach.

Imagine the meeting when the ‘maximum thrust approach’ decision may have been taken. With IndiGo’s relentless focus on costs, whoever presented the ‘maximum thrust’ analysis would have got an attentive hearing from the leadership team. There were likely smiles round the room, as the rupees saved was totalled up. Small savings add up to big bucks at the scale and frequency that Indigo operates. But with the repeated engine issues, their credibility has taken a hit and so has their share price, which lost almost 8 per cent in the last month.

As it turned out it was a case study in being penny-wise, pound-foolish. Yet they are not alone. Several business leaders have salivated at the short-term gains that a specific decision brings them, only to pay a big price later.

Decision-making bias

Why does this happen and what can we do to avoid such a course of action?

First, it could just be plain greed for higher profits. Sometimes, this can be the desire to look good, as plaudits accompany the CEO who delivers quick results. Boards like it, the markets like it. Sometimes, personal stock plans, bonuses and salaries that are tied to profits can lead to an unconscious bias in decision-making. Several CEOs and leaders have fallen prey to this, where a personal monetary benefit has coloured their business decisions. Another reason is stock price pressre — by itself an extremely short-term measure, if the daily swings define the mood and culture.

This could also happen when a company loses sight of what business it is in and merely sees itself as a revenue and cost assembly line. The cost decisions are taken with an extremely transactional mindset, without an appreciation of the impact on the broader business and the reason it exists.

Focus on the customer

In the mix of metrics, cost savings and hard-fought profits, the customer is sometimes forgotten. Cost savings decisions that in some way affect the customer experience will eventually come back to bite the company. Restaurant chains that dropped an important ingredient are suddenly surprised when customers stop coming back.

Car companies that save costs by compromising on safety equipment, get a hard dose of reality when accidents damage sales. This is not to say that the customer is always right. There will always be customer expectations that could fall outside the spectrum of what the business stands for, its strengths and what it has decided to focus on. But for its core customer base, a good question for leaders to ask when cost cuts are envisioned is: “What does this do for the customer or to the customer experience?”

Focus on employee culture

When employees get the sense that the company and its leaders are willing to cut corners to save costs, or improve profits, a pernicious culture starts to spread. Leaders will soon find themselves ambushed by problems they didn’t see coming, because employees chose to take decisions that harm the company, its business and the customer. Because they practised the ‘follow what they do, not what they say’ rule, when observing their leaders.

Hospital chains that routinely pad patients’ bills, will likely not anticipate pilferage and fraud by employees – but that will be a possible outcome when employees read the culture as short-term personal gain over the long-term organisational good and patient care.

Focus on long-term value

Paul Polman, Unilever’s former CEO, gave his leaders the freedom to focus on long-term value. He showed he meant it by eliminating the practice of quarterly earnings calls and guidance. Genuine leaders realise that if they perform according to tested values, if they are rigorous in focusing on real benefit — eventually the organisation will gain much more than a short-term win would have given them.

Demonetisation in India turned out to be a ‘cannon to kill a mosquito’ with a focus on chest-thumping bravado and sound bites as opposed to what was really good for the citizens. The economy and the common man are still paying the price.

The question really is around values. Leaders’ values will guide them through these choices.

Australian cricketer Cameron Bancroft, who was at the centre of ‘sandpaper gate’, talks about his decision to follow Warner’s instructions to tamper with the ball. “I didn’t know any better because I wanted to fit in and feel valued. The decision was based around my values, what I valued at the time, and I valued fitting in…you hope that fitting in earns you respect and with that...there came a pretty big cost for the mistake.”

The players knew that in the short term, they had to win matches but something more valuable was that they played by the rules, that they represented their country in the right way, that they did justice to fans’ expectations. They chose to sacrifice long term at the altar of short term and lost it all. Business leaders need to reflect when they are faced with such choices, and understand that it never pays to be penny wise and pound foolish.